Commentary

D1.718 Accounting for loan relationships

Corporate tax
Corporate tax | Commentary

D1.718 Accounting for loan relationships

Corporate tax | Commentary

D1.718 Accounting for loan relationships

The accounting standards apply differently to creditor and debtor loan relationships. The concept of generally accepted accounting practice and the treatment which applies to creditor and debtor loan relationships is considered in the following paragraphs. HMRC guidance can also be found in its corporate finance manual1

Generally accepted accounting practice

The definition of generally accepted accounting practice is detailed at B2.102. Where a company does not prepare its accounts in accordance with generally accepted accounting practice (or does not prepare accounts at all) the loan relationships legislation applies as if such accounts had been prepared. If a company prepares its accounts for an accounting period in accordance with generally accepted accounting practice and those accounts rely to any extent on amounts brought forward from an earlier period for which the company did not prepare its accounts in accordance with generally accepted accounting practice, the brought forward amounts have to be determined as if the earlier accounts had been prepared in accordance with generally accepted accounting practice2.

In Greene King plc3, the Upper Tribunal affirmed the First-tier Tribunal decision which upheld HMRC's view that the returns and accounts submitted by a group of companies failed to comply with generally accepted accounting practice. The companies had adopted a scheme devised by a large accountancy firm, which was intended to exploit a perceived loophole in the loan relationship provisions and allow a subsidiary company to claim a deduction for interest payable without the parent company being taxed on that interest.

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